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Focused approach, rise in income to help fund goals
Despite a high income and net worth, the Prasads will have to increase
and realign their equity exposure if they want to realise all their goals. They
should also secure their health to be able to enjoy their assets.
SAKINA BABWANI
PRASADS’ GOOD MOVES ...
Buying real estate at an early stage in life.
Having bought adequate life insurance.
… AND THE BAD ONES
Purchasing inadequate health cover.
Relying too much on debt, not on equity.
Not earmarking mutual fund SIPs for specific goals.
With a net worth of nearly 1.5 crore, it is clear that
the Prasads have laid a strong financial foundation for themselves. The problem
is not the availability of resources, but the suspicion towards equity, and
this reflects in their portfolio. With 53% of their portfolio invested in real
estate and 38% in debt, liquidity and inflation remain the biggest concerns for
this family of four. The Prasads seem to have realised this mistake.
“Initially, I didn’t understand much about equities. That’s why I stuck to
traditional instruments like real estate and debt. Now, I have begun investing
in mutual funds through SIPs,” says Rajesh Prasad, 35, who works with an MNC in
Bangalore. Their high income, coupled with a disciplined approach, can help the
Prasads achieve their goals if, of course, they shed their inhibition about
equity.
Rajesh lives with his 33-year-old wife, Anjali, and two
daughters, Aditri (8) and Riddhi (5). Rajesh takes home a monthly salary of 1.1
lakh, while Anjali earns 35,000 every month as a college lecturer. In addition,
they earn 11,800 as monthly rental income from their second home in Bangalore.
In 2010, the Prasads moved to a bigger home, which was bought with a loan of 60
lakh, and leased out their previous house. Currently, they shell out an EMI of
38,776 to service this loan. Apart from the EMI, the monthly household expenses
work out to 51,000. After accounting for their expenses, premiums, and
investments, the family is left with a measly surplus of 1,601 every month. As
their current surplus is not very high, the Prasads will have to redirect some
of their current investments to achieve their goals, which are simple enough.
They want to build funds for their daughters’ education and weddings, as well
as a corpus for their retirement, which is almost two decades away.
Since retirement is a priority, let us start with the
planning for this goal. On the basis of their current standard of living,
Pankaaj Maalde of ApnaPaisa.comhas calculated that the couple will need a
corpus of 8.35 crore after 23 years. The EPF and PPF can contribute 4.28 crore
towards this goal. Another 71 lakh can come from the insurance policies. Their
infra bond investment can contribute 3 lakh to this goal. The rest can be
funded from the second home, which is expected to fetch 3.4 crore after 23
years.
For meeting their daughters’ education expenses, their
current investment in mutual funds will come in handy. The Prasads put in
40,000 through 12 SIPs. However, Maalde feels that there is too much diversification
and that the funds have not been earmarked
to meet specific goals. Hence, the couple needs to start SIPs with specific
goals in mind. To begin with, they need to build a corpus of 2.56 crore for
their daughters’ education. For this, they will have to start two SIPs. To meet
Aditri’s education expenses of 1.13 crore after 12 years, one SIP of 24,000 in
the ratio of 90:10 in equity and debt mutual funds should help them achieve the
goal. Assuming a growth rate of 14.3% per annum, this will generate the desired
corpus within the specified time frame.
To fund Riddhi’s education expenses, they need a corpus
of 1.43 crore in 15 years. Again, the couple will have to start an SIP of
23,000 in the ratio of 90:10 in equity and debt mutual funds. However,
currently the couple is falling short of 3,899 to make investments for this
goal. Hence, they can rely on their cash balance for the first year, after
which a rise in salary can help take care of this goal.
Next in line are the goals of their daughters’
weddings. For this, the Prasads need to start two SIPs of 9,000 and 7,000.
However, at this point, they do not have the cash to invest for these goals.
Hence, they can postpone these by a year and start investing from next year,
when a rise in salary can help them fund this objective. The SIP of 9,000 in
equity and debt funds in the ratio of 90:10 will generate 74 lakh in 17 years
to fund Aditri’s marriage, while a SIP of 7,000 in the same ratio will generate
93 lakh in 20 years for Riddhi’s wedding.
Considering their current income, assets and
dependants, Maalde has arrived at an insurance cover of 2.37 crore for the
Prasads. Presently, the couple has one term plan and four traditional insurance
policies, which give them a combined cover of 1.46 crore. Apart from this, they
have assets worth 71.7 lakh (excluding their self-occupied house and jewellery
worth 18 lakh). Hence, Maalde is of the opinion that they
are sufficiently secured when it comes to life insurance. However, they must
surrender the LIC endowment plan as it is unlikely to beat inflation. The
proceeds of the plan can be used to invest in equity mutual funds. The Prasads
must also review their HDFC Crest plan after five years. Moreover, Anjali’s
Ulip, ICICI Life Time Super, has not been performing in line with the benchmark
index. Hence, it should be surrendered. As Anjali has already completed five
years with the plan, there will be no surrender charges.
The Prasads may have adequate life insurance, but their
health insurance is not up to the mark. They have bought LIC Jeevan Arogya plan
to cover their medical expenses. However, this only covers major surgeries and
is not a mediclaim policy. Hence, he recommends that the family discontinue
this plan and buy a 3 lakh individual plan for each of the four family members.
Additionally, they can buy a top-up plan of 5 lakh. The monthly premium for
these plans will be 1,500. Though, his health insurance premium will shoot up
by 1,000 every month, he will be saving 1,500 on life insurance premium as he
will be surrendering two insurance plans.
RECOMMENDATIONS
MUTUAL FUNDS
Current holdings: CRMF-Equity Tax
Saver, DSP Blackrock World Gold, Fidelity International Opportunities, HDFC
Prudence, HDFC Top 200, IDFC Premier Equity, JM Multi Strategy, SBI
Infrastructure, SBI Magnum Sector Funds Umbrella Contra, Sundaram S.M.I.L.E,
HDFC Balanced, UTI Opportunities Advice:Reliance Equity
Opportunity, ICICI Pru Discovery. Rationale: While it is important that the Prasads invest in equity through mutual
funds to achieve their goals, the current profile is too cluttered. They can
continue with with UTI, IDFC schemes and HDFC Top 200 and switch to recommended
equity schemes from balanced funds.
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